Posts Tagged ‘Oil Prices’

The economy is shrinking. Although unemployment is low, poverty is increasing, Inflation is at double-digit rates. The exchange rate for the ruble is falling. Russia’s trade deficit is widening. The Russian government is cutting spending on public services.

While Russia has serious internal economic problems, the immediate cause of the crisis is the economic war being waged by its foes.

The United States and European Union boycott many Russian individuals and institutions, including cutting off credit to Russian banks and cutting off sales of equipment to Russian oil companies.

Saudi Arabia has stepped up production of oil, driving down oil prices worldwide and hurting Russia’s oil exports.

The United States has begun a new arms race with Russia, forcing the Russian government to either divert resources from the civilian economy or admit inferiority.

In waging economic war against Russia, the United States and its allies hurt themselves as a price of hurting Russia more.

But why are oil prices falling? It is because Saudi Arabia, the world’s largest oil exporter, is committed to pumping oil in large volume instead of shutting back in order to prop up the price.

What gives the Saudis so much leverage is that their production costs are low, and they can make a profit at a lower price than can Russians, Venezuelans or others.

That’s why the U.S. supports Saudi Arabia’s foreign policy, and why President Obama recently reassured King Salman that the U.S. will continue its cold war against Iran despite the agreement with Iran over sanctions and nuclear facilities inspections.

My question is whether it is in the U.S. interest to wage cold war against either Iran or Russia. There is no moral issue here. The Iranian and Russian regimes are bad enough, but everything bad you can truthfully say about them goes double or triple or maybe 10 times for Saudi Arabia.

Russia is a land rich in natural resources and human talent. It has been an industrial nation for more than a century. Why hasn’t it developed a world-class manufacturing industry in anything but armaments? If it had, Russia would not be jeopardized by falling oil prices.

One explanation is that Russia has been held back by world trade treaties, which restrict Moscow’s right to subsidize its infant industries—even though that has been the method by which every new industrial nation, except Great Britain, which was the first, has made up the head start of the older industrial nations.

During the Napoleonic Wars, the young United States was cut off from trade with Europe, which New England manufacturers used as an opportunity to develop our domestic manufacturing industry.

Another is that the Russian economy is controlled by a corrupt financial oligarchy, which is interested only in extracting profit for themselves and not in building for the future. Probably the truth lies somewhere in between.

I don’t think that having a strong oil industry in itself is a curse that prevents development of manufacturing.

The United States was a leading oil producer and exporter in the first half of the 20th century, and Americans leveraged that advantage to develop an mass-produced auto industry, a chemical industry and other industries based on cheap and plentiful oil.

To the extent that Russia is shackled by the international economic system, the current crisis represents an opportunity to break free of that system.

To the extent that Russia’s problem is its own dysfunctional political and economic system, it means the country must either reform or become a satellite of China or the West. Or, in the worst case, Russia could become a Ukraine writ large, a prize for other, more powerful states to fight over.

This chart, made by Goldman Sachs and reprinted by Business Insider, which I found on a Naked Capitalism link, shows the rise and fall and rise and (very probably) the impending fall of the price of oil on world markets.

It’s partly an example of the law of supply and demand in action. When the price of something goes up, people use less of it, look for ways to produce more of it, and invent substitutes for it, and eventually that brings the price back down again.

But I think it shows something else, and that is the end of easy-to-get oil. Hydraulic fracturing, deep water ocean drilling and Arctic drilling will increase the supply of oil over time, but oil will never be available as easily or as cheaply as from the historic oil fields in Texas and the Persian Gulf.

I don’t think oil will ever again be as cheap as it was during the years from 1880 to 1970—at least not for long. And that’s probably a good thing in the long run. So long as oil and other fossil fuels are cheap, we’ll keep on making new greenhouse gasses and burn up the planet.

The Saudi Arabian government says it will allow oil prices to fall to $80 a barrel, an action that will hurt oil-producing nations such as Iran, Russia and the United States. Saudis control so much of the world’s oil that they can set prices by increasing or cutting back on production.

This will be good for American homeowners and motorists as we face another severe winter, but it makes domestic oil and gas production, and also renewable energy, less competitive in the marketplace. To the extent that the United States is increasingly dependent on its energy industry, this hampers the economic recovery.

Yves Smith quoted sources who think the Saudis are doing this to punish the U.S. for failing to overthrow the government of Syria.

Thousands of Americans lost their homes to foreclosures years ago, and thought they had closed the door on this part of their lives. Now they find debt collectors coming after them for the unpaid balance.

The most aggressive of the debt pursuers are the two government-owned mortgage companies, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).

Dr. Francis Collins, the head of the National Institutes of Health, said the NIH has been working on a vaccine for the Ebola virus since 2001, and would have found one if not for cuts in the NIH research budget.

Whether a vaccine really would have been discovered is unknowable. But funds for research on infectious diseases should be increased, not decreased. The Ebola virus will not be the last mutant killer disease that is invulnerable to known antibiotics.

One of the justifications for going to war in the Middle East is to make sure we Americans have access to oil.

During the run-up to the 1991 Gulf War, Secretary of State James Baker said the issue was “jobs, jobs, jobs.” He didn’t explain, but what I and other Americans took him to mean that if Saddam Hussein cut us off from the oil of Kuwait, our industrial machine would falter.

But there was no danger of that happening. Saddam Hussein was perfectly happy to sell Iraq’s oil, and would have been perfectly happy to sell Kuwait’s oil.

The oil-producing nations have just as much need to sell their oil as the oil-consuming nations have to buy it.

U.S. interventions in the Middle East have reduced American access to oil, not secured it. The sanctions against Iraq in the 1990s, the continuing sanctions against Iran and the new sanctions against Russia have been intended to prevent these nations from selling their oil and natural gas. The invasion of Iraq destroyed much of that nation’s oil-producing capability, which is only now recovering.

All this made oil and gas prices higher, not lower.

The only time U.S. access to Middle East oil was cut off was during the OPEC oil embargo of 1973. But the embargo was broken without military action. It was broken by the international oil companies who sold the oil to whoever wanted to buy it. [1]

Since then there has never been another threat to U.S. oil imports. The most strongly anti-American leaders, Libya’s Qaddafi and Venezuela’s Hugo Chavez, never refused to do business with the United States. Politics was one thing; business, another.

I finished reading Daniel Yergin’s The Prize: the Epic Quest for Oil, Money and Power, tells the story of the world oil industry from its beginning with the drilling of the first oil well in Titusville, Pa., in 1859 to Saddam Hussein’s failed invasion of Kuwait in 1991, with a brief epilogue bringing it up to date. I’m now reading his current book, The Quest: Energy, Security and the Remaking of the Modern World.

It is a big, detailed book which I would not recommend except to somebody such as myself with a lot of time on their hands. I read it, even though it was published 20 years ago, because I believe the best way to understand something is to understand its history.

The main things I took away from the book:
▪ An appreciation that the creation of the modern oil industry really was an epic achievement in terms of engineering, technology, organization and the enormous obstacles, both natural and human-made, to be overcome.
▪ An understanding of the central place of the United States in the history of the world oil industry, and of the oil industry in the development of the United States
▪ An understanding of the key importance of oil in world politics and military power.
▪ A realization that the history of the world oil industry has always been a cycle of boom and bust, glut and scarcity, which makes the current runup in gasoline prices nothing new.

Nowadays I think of oil in terms of the Middle East, but for a century or more the United States was the main producer and exporter of oil. In the earliest days most of the world’s oil supply came out of Pennsylvania, and the next big discoveries were around Baku in the Russian Empire and Borneo and Sumatra in the Dutch East Indies. Texas and Oklahoma did not become important oil regions until late in the 1920s, and Saudi Arabia until after World War Two.

Cheap oil made possible much of what we regard as the American way of life. The oil industry was created to provide kerosine for illumination, as a substitute for illumination. But without a pre-existing oil industry, there would have been no auto industry, aviation industry or any other industry based on internal combustion. Early U.S. preeminence in oil made possible our early preeminence in these other industries. Our periods of greatest prosperity, especially the period from 1945 to 1973, coincided with low oil prices.

I tend to take fruits of oil-fueled industry for granted, but, as Yergin pointed out, there was a time when none of this existed. Somebody had to think of drilling for oil instead of digging for oil. Somebody had to think of setting up gasoline pumps instead of selling it in cans. Somebody had to figure out how to drill for oil in the jungles of Borneo, the deserts of Persia, the bottom of Lake Maraciabo in Venezuela and the north slope of Alaska. It really was an epic story.

Crude oil prices adjusted for inflation. Double click to enlarge.

We think of oil in terms of scarcity, but there have been times when an oil glut was considered the more serious problem. This was the case during the Great Depression, when the Texas oil industry was collapsing under overproduction of oil. The Texas Railroad Commission (which, despite its name, regulated oil) worked with the Roosevelt administration to set up a system of production allocations regulating what could be taken from each oil field. The federal government restricted foreign imports to prevent Texas oil from being overwhelmed.

Texas increased and decreased production in order smooth out the cycle of boom and bust, so that oil-using businesses wouldn’t be ruined by sudden increases in oil prices nor oil producers by the sudden collapse.

This helps explain why Texas oilmen for so many years supported the Democratic Party. When I first learned how this system worked, back in the 1950s, it seemed to me to be an example of government-protected monopoly working against the public interest. After reading Yergin’s book, I can see the need for some entity to fulfill the function of the Texas Railroad Commission. Price controls don’t work, as we Americans learned in the 1970s. But it is a good thing to smooth out swings in prices when they are so wild that they periodically crash an industry.

In later years Saudi Arabia took over the function of swing producer, which partly explains the tight relationship between the U.S. government and the Saudi royal family since President Franklin Roosevelt’s first meeting with King Ibn Saud in 1945. Saudi Arabia’s function as swing producer has been a great source of tension with Iran. The Iranian government, which unlike Saudi Arabia rules over a large population who need jobs and income, has always wanted to maximize production and income, while the Saudis have been able to afford to take a longer view.

U.S. gasoline prices adjusted for inflation

There’s a lot more in the book. I put it down with a greater awareness of how oil is intertwined with everything and what a radical change ending our “addiction” would be.

Republican candidates say rising gasoline prices are due to President Obama and his administration’s onerous restrictions on the domestic oil industry. But I don’t see his administration as being all that restrictive. There is more oil drilling in the Gulf of Mexico that before the Deepwater Horizon oil spill. Overall U.S. domestic oil production is up 20 percent from 2008, according to energy expert Daniel Yergin.

Democratic liberals say that the cause is Wall Street speculators who are bidding up the price of crude oil. Normally speculators account for about 30 percent of futures contracts on crude oil and producers and users 70 percent, but now they have 60 percent of the market, according to economist Robert Reich, or 80 percent, according to Senator Bernie Sanders. They say speculators have free rein because the Commodity Futures Trading Commission’s plan to limit what speculators can acquire has been overruled by a court decision.

But there wouldn’t be speculation if speculators didn’t have reason to think oil prices will go up in the future anyway (or if they were in a position to corner the market). The emgargo against Iranian oil has tightened the world’s supply of oil. Actual war with Iran would create a huge shortage. More than 20 percent of the oil sold on world markets goes through the Straits of Hormuz, and that would be jeopardized by war with Iran.

Other factors are the increasing demand for oil from China and other emerging countries, and the fact that in the annual cycle of gasoline prices, prices normally rise a bit in the spring.

I think it would be a good thing for the Commodity Futures Trading Commission to have the authority to limit speculation in oil futures, but I don’t think this will prevent gasoline prices from going up in the long run. I don’t think President Obama’s policies toward domestic oil production affect oil or gasoline prices, but I think his war talk about Iran spreads panic about future oil supply, which leads to hoarders bidding up the price of oil.

The Obama administration is drifting toward war with Iran. Besides the obvious risk of a repeat of the U.S. invasion of Iraq, there are risks of another oil price shock and of confrontation with China.

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Iran is the world’s third-largest oil exporter, behind Saudi Arabia and Russia. The United States government is trying to organize a world oil embargo against Iran. Saudi Arabia’s rulers promise to increase their own oil production to make up for Iranian oil being taken off the world market. Iran’s rulers threaten that if that happens, Iranian forces will close the Strait of Hormuz, through which 20 percent of the world’s oil exports go.

The United States gets most of its oil from domestic production and other Western Hemisphere sources, but the nations of Asia depend on Middle East oil. The Chinese expect to more than double their consumption of oil within the next 10 years. The Chinese government has tried to befriend Iran while getting along with the United States. But if China’s oil supply is jeopardized, there could be a serious confrontation. Since the United States and China are the world’s two largest oil importers, there could be a confrontation anyway, as oil becomes harder to find and more expensive to produce.

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Nima Khorrami Assi, a security analyst at the Transnational Crisis Project in London, wrote recently that, until now, China and also India have sought to acquire oil supplies through a policy of neutrality, nonintervention and cooperation with all governments. But he said that the two countries are adopting different policies over the U.S.-Iran confrontation.

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India aligns with the United States, Japan and the Arab kingdoms in the Gulf Cooperation Council, which so many Indians work overseas and which are potential customers for India’s information technology products. But China, in his view, is joining Russia as a protector of Iran, splitting the world’s major powers into two competing blocs. I can’t say whether is true, or whether there is any truth in reports that China is supplying Iran with advanced military technology. But these are things that could be true, or could be true in the future if they aren’t happening now.

A writer for Forbes asserted that if the Strait of Hormuz is closed, even temporarily, world oil prices could triple. That’s the last thing the United States or the European Union nations need, as they struggle to pull out of the deepest recession since the 1930s.

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But it might not come to that. Pepe Escobar, roving correspondent for the Asia Times of Singapore, noted that Pakistan has given the go-ahead to a new pipeline which will bring Iranian natural gas to the Indian subcontinent, bypassing any naval blockage.. He noted that Iran has excellent relations not only with China and Russia, but also Iraq, Afghanistan, Pakistan, not to mention Venezuela, Ecuador, Bolivia and other nations of the non-aligned movement.

The great danger, as he sees it, is escalation of the low-intensity war that the United States is waging against Iran into a major military conflict. The United States is losing economic power, but it still has military power. The temptation will be to try to leverage military power into economic power.